Head of JP Morgan Chase's investment unit, James Staley, says that money market funds are the biggest risk to the financial system now. With over $4 trillion parked in money markets, they are lightly regulated and hold no reserves should something go wrong.
“What keeps me up at night most of anything we do at JPMorgan Asset Management is the money-market fund space,” Staley said at a discussion hosted today by Credit Suisse Group AG in Davos, Switzerland. “One of the things that has to come out and get a lot more attention and discussion is how do we take the systemic risk posed by money funds out of the system?”
Last September, the collapse of one of the largest money market funds, the Prime Reserve fund led to a run on money markets that was only stopped when the Fed stepped in with guarantees (what hasn't the Fed guaranteed).
Now, many are reexaming money market funds to determine just how much of a problem they pose. Money market funds are comprised of highly rated short term debt as well as cash to meet any redmpetions and ensure liquidity. They were considered a very safe investment vehicle.
But with a wave of bankruptcies predicted, even high quality, short term corporate debt may be risky. As we've learned, the ratings agencies have their own agendas and can't be fully trusted. So even if they rate a bond highly, it is not necessarily safe. The sudden collapse of Lehman Bros. led to the fall of the Prime Reserve Fund.
The Group of 30, an independent policy organization whose members include Larry Summers and Treasury Secretary Tim Geithner have proposed either forcing money market funds to either adopt banking industry controls (reserve funds, more regulation) or give up their goal of maintaining a $1 NAV. In essence, accepting regulation and reserves would make money markets into bank deposits, while not accepting would turn them into bond funds.
What does this mean for the average investor? Be cautious and investigate your money market holding. If you have free cash from your brokerage account invested in a money market fund you may want to take another look and feel comfortable with what the funds are invested. Money market fund yields continue to fall, making them a relatively poor investment compared to FDIC money market and savings rates. And unlike FDIC insured bank accounts, your money markets can lose value.
Market market fund rates dropped to record lows this week driven by the drop in short term treasury yields. The top money market fund rate according to BestCashCow is the Vanguard Prime / MMF Investor paying a 7 day trailing yield of 1.64%. That's down from a top rate of 2.56% in June 2008 and 4.36% in January 2008.
The average seven-day yield on taxable money-market funds fell below 0.50 percent for the first time in history, to 0.48 percent for the week ending yesterday, according to data compiled by IMoneyNet of Westborough, Massachusetts. Tax-free and municipal money funds remained at an all-time low of 0.29 percent for the second week.
Money market funds, unlike money market accounts are not FDIC insured, although some money may be insured in the wake of the Fed's action to shore up money market funds. In September of 2008, the Fed announced it was backing money in money market funds that were deposited before September 19, 2008 for a period of one year.
Still, it's hard to get excited about money market funds at these low rates. Investors may want to consider savings and money market accounts that are paying over 2 percentage points more in interest and are FDIC insured up to $250,000 through December 31, 2009 and $100,000 after that.
President Obama may have the FDIC run a "bad bank" that will purchase the toxic assets from bank balance sheets. Sound familiar? But this bad bank doesn't solve the central issue, how to value thes toxic assets.
President Obama may have the FDIC run a "bad bank" that will purchase the toxic assets from bank balance sheets. The news is being reported in most financial publications.
Bloomberg writes:
"The Federal Deposit Insurance Corp. may manage the so-called bad bank that the Obama administration is likely to set up as it tries to break the back of the credit crisis, two people familiar with the matter said. "
This is of course, TARP redux. The original TARP was supposed to do just that. Buy toxic assets and get them off bank balance sheets. It was abandoned because no one could figure out how to price these assets. The central pricing dilemma is this: price the assets to high and the banks are being subsidized at taxpayer expense. Price them too low and the banks aren't receiving any real benefit from the sale of the assets. Finding the middle ground is extremely difficult and no one has figured out how to do it.
Estimates put the cost of this plan at over $1 trillion. The FDIC is exploring issuing debt backed by the agency to pay for the cost. More debt, dubious outcomes - I don't know but I'm starting to wonder if it might be better to let these toxic assets sit and instead provide funding to banks that don't need to be bailed out.
